Q1 2024 Ciena Corp Earnings Call
Operator: Good day and welcome to the Ciena High School First Quarter 2024 Financial Results, All participants will be in a listen-only mode. Unknown Attendee, Gary Smith, Amit Daryanani, Samik Chatterjee, David Vogt, Karan Juvekar, , , , , , , , , , , , , , , be an option, https://www.larryweaver.com U.S, star, then one on a touch tone. Try, star.
Good day and welcome to the CNS.
Fiscal first quarter 2024 financial results conference call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May press star.
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Gregg M. Lampf: Note: For this event, I would now like to turn the conference over to Gregg. Vice President of Investor Relations, go ahead. Thank you, Dave. Good morning, and welcome to Ciena's 2024 fiscal first quarter conference call. On the call today are Gary Smith, President and CEO, and Jim Moylan, CFO. Scott McFeely, Executive Advisor, is also with us for Q&A. In addition to this call and the press release, we have posted to the Investors section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter. Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business, as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations.
Note. This event is being recorded.
I'd now like to turn the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.
Gregg M. Lampf: Thank you Dave.
Gregg M. Lampf: Good morning, and welcome to <unk> 2020 for fiscal first quarter Conference call.
Gregg M. Lampf: On the call today is Gary Smith, President and CEO and Jim Moylan CFO.
Gregg M. Lampf: Scott Mcfeely Executive advisor is also with us for Q&A.
Gregg M. Lampf: In addition to this call and the press release, we have posted to the investors section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter.
Gregg M. Lampf: Our comments today speak to our recent performance our view on current market dynamics and drivers of our business as well as a discussion of our financial outlook.
Gregg M. Lampf: Today's discussion includes certain adjusted or non-GAAP measures of <unk> results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.
Gregg M. Lampf: A reconciliation of these nine gap measures to what gap results is included in today's press release. Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements. Such statements, including our quarterly and annual guidance and our long-term financial outlook and discussion of market opportunities and strategy, are based on current expectations, forecasts, and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. Assumptions relating to our outlook, whether mentioned on this call or included in the investor presentation that we will post shortly after, are an important part of such vocal statements, Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K and our 10-Q, which will be filed with the SEC today. Cien assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise.
Speaker Change: Before turning the call over to Gary I'll remind you that during this call, we'll be making certain forward looking statements such statements, including our quarterly and annual guidance and our long term financial outlook and discussion market opportunities and strategy are based on current expectations forecasts and assumptions regarding the company and its markets which include rate risks.
Speaker Change: And uncertainties that could cause actual results to differ materially from the statements discussed today.
Gary B. Smith: Assumptions relating to our outlook, where they mentioned on this call are included in the Investor presentation that we will post shortly after.
Speaker Change: Part of such forward looking statements and we encourage you to consider them.
Speaker Change: Our forward looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K, and our 10-Q, which will be filed with the SEC today.
Speaker Change: She and assumes no obligation to update the information discussed in this conference call, whether as a result of new information future events or otherwise.
Gregg M. Lampf: As always, we'll allow for as much Q&A as possible today, though we ask that you limit yourselves to one question and one follow-up. As a reminder, we'll be hosting investor group meetings with the sell side at OFC later this month. We look forward to seeing many of you in San Diego. With that, I'll turn it over to Gary.
Speaker Change: As always we will allow for as much Q&A as possible today, they'll ask that you limit yourselves to one question and one follow up.
Speaker Change: As a reminder, we will be hosting investor group meetings with sell side at OFC. Later. This month, we look forward to seeing many of you in San Diego with that I will turn it over to Gary.
Gary B. Smith: Thanks, Gregg, and good morning, everyone. As you saw in the press release today, we reported strong fiscal first-quarter results, including revenue of $1.04 billion and adjusted gross margin of 45.7%. Our Q1 performance also included very strong profitability metrics, with quarterly adjusted operating margin of 13.2% and adjusted EPS of $0.66. Additionally, we generated $250 million in free cash flow during the quarter.
Gary B. Smith: Thanks, Greg and good morning, everyone.
Gary B. Smith: As you have seen from the press release today, we reported strong fiscal first quarter results, including revenue of 1.04 billion and adjusted gross margin of 45, 7%.
Gary B. Smith: Our Q1 performance also included very strong profitability metrics with quarterly adjusted operating margin of 13, 2% and adjusted EPS of <unk> 66 cents.
Gary B. Smith: Additionally, we generated $250 million in free cash flow within the quarter.
Gary B. Smith: Unknown Attendee, The drivers of bandwidth demand remain strong, and we believe them to be very durable, and network traffic is increasing as a result. And we remain incredibly focused on growing our business and capturing additional market share. Specifically, we are taking advantage of bandwidth growth and cloud adoption trends to extend our leadership in optical and to expand our addressable market, particularly in metro routing and broadband access. Fundamental to these growth ambitions is the expansion of our relationship with cloud providers as they rapidly grow their global network. Reflecting these expanded relationships, in Q1, non-telco revenue accounted for over 54% of our total revenue, and all that. Direct cloud provider revenue was $346 million in the quarter, up 38% year over year.
Gary B. Smith: Yeah.
Gary B. Smith: The drivers of bandwidth demand remained strong and we believe very durable and network traffic is increasing as a result.
Speaker Change: And we remain incredibly focused on growing our business and capturing additional market share.
Speaker Change: Specifically, we are taking advantage of bandwidth growth and cloud adoption trends to extend our leadership in optical and to expand our addressable market, particularly in metro routing and broadband access.
Speaker Change: Fundamental to these growth ambitions is the expansion of our relationship with cloud providers.
Speaker Change: As they rapidly grow that global networks.
Speaker Change: Reflecting these expanded relationships in Q1, non telco revenue accounted for over 54% about total revenues.
Speaker Change: And all of that.
Direct cloud provider revenue was 346 million in the quarter up 38% year over year.
Gary B. Smith: And both of our 10% customers in the quarter were, in fact, cloud providers. Orders from cloud providers were also up year over year in Q1. And we continue to secure new deals with all of the major players in this segment. In Q1, for example, we had a significant design win for our 400G ZR Plus pluggables with a very large cloud provider, which we plan to begin shipping and taking revenue on later this year. We were also recently selected by a major cloud provider as its primary vendor for its future global architecture based on our RLS platform. So it is very clear that we've been broadening our engagement with cloud providers, including discussions around how we can leverage our leading innovation as AI becomes a growing driver of traffic and a great opportunity for us.
And both of our 10% customers in the quarter were in fact cloud providers.
Speaker Change: Orders from cloud providers were also up year over year in Q1, and we continue to secure new deals with all of the major players in this segment.
Speaker Change: In Q1 for example, we had a significant design win for our 400 G. ZR plus plugging holes with a very large cloud provider, which we plan to begin shipping in taking revenue on later this year.
Speaker Change: We were also recently selected by a major cloud provider as their primary vendor for its future global architecture based on our Rls platform.
Speaker Change: So it is very clear that we've been broadening our engagement with cloud providers, including discussion around how we can leverage our leading innovation as AI becomes a growing driver of traffic and a great opportunity for us.
Gary B. Smith: In fact, with about 50% plus market share in data center interconnect, we are incredibly well positioned to benefit as more data centers are built, and when AI traffic flows begin to come out of those data centers. We are also developing solutions for inside the data center, a whole new market for us. And this is based on our next-generation pluggables family, as existing technologies are unlikely to satisfy the rapidly increasing requirements of this critical application space.
Speaker Change: In fact with about 50% plus market share in data center interconnect, we are incredibly well positioned to benefit as more data centers are built and when AI traffic flows begin to come out of those data centers.
Speaker Change: We are also developing solutions for inside the data center, a whole new market for US and this is based on a next generation plug a bull's family as existing technologies are unlikely to satisfy the rapidly increasing requirements for this critical application space.
Gary B. Smith: This momentum really exemplifies the strong confidence we have in our position with cloud providers and our belief that we will have a very strong 2024 with them as we continue to expand these important long-term relationships. However, at the same time, the normalization of order volumes from our service provider segment is not materializing as we expected. We were very clear in our commentary last quarter that our fiscal 2024 financial performance would be largely determined by the timing and magnitude of order flow from our service provider customers, particularly those in North America. More specifically, we expected to see orders from these customers begin to increase significantly in Q2. And as we sit here today, it is taking longer than we and many in the industry anticipated for these customers to absorb their high levels of inventory. This is, in part, due to difficulties installing and deploying equipment, including site readiness and access to fiber, which is limiting their placement of new orders and the absorption of existing inventory.
Speaker Change: This momentum really exemplifies the strong confidence we have in our position with cloud providers and our belief that we will have a very strong 2024 with them as we continue to expand these important long term relationships.
Speaker Change: However at the same time.
Speaker Change: The normalization of order volumes from our service provider segment is not materializing as we expected.
Speaker Change: We were very clear in our commentary last quarter that our fiscal 2024 financial performance would be largely determined by the timing and magnitude of order flow from our service provider customers, particularly those in North America.
Speaker Change: Okay.
Speaker Change: More specifically, we expect to see orders from these customers begin to increase significantly in Q2 and.
Speaker Change: And as we sit here today, it is taking longer than we and many in the industry anticipated for these customers to absorb the high levels of inventory.
Speaker Change: This is in part due to difficulties installing and deploying equipment, including site readiness and access to fiber, which is limiting their placement of new orders and the absorption of existing inventories.
Gary B. Smith: In addition, in other parts of the world, we are seeing some caution driven largely by macroeconomic concerns that are contributing to lower than expected order volumes from service providers in certain international geographies, almost entirely and predominantly in Europe. Our current view, based on our discussions with customers, is that we now expect a recovery in order patterns from service providers to occur more gradually over the next few quarters. And Jim will speak shortly about how we expect this to impact our business outlook. But I want to emphasize that we and our customers view these dynamics as temporary. And to be clear, we are confident in the durability of the underlying demand drivers in the industry and our ability to continue to take share and grow over the mid to longer term.
Speaker Change: In addition in other parts of the World. We are seeing some caution driven largely by macroeconomic concerns that are contributing to lower than expected order volumes from service providers and certain international geographies almost entirely in predominantly being Europe.
Speaker Change: Okay.
Speaker Change: Our current view based on our discussions with customers is that we now expect to recovery in order patterns from service providers to occur more gradually over the next few quarters.
Speaker Change: And Jim will speak shortly about how we expect this to impact our business outlook.
James E. Moylan: What I want to emphasize that we and our customers view these dynamics as temporary.
James E. Moylan: And to be clear, we are confident in the durability of the underlying demand drivers in the industry and our ability to continue to take share and grow over the mid to longer term.
Gary B. Smith: In fact, there are several key highlights from our Q1 performance that really illustrate the strength of these fundamental demand drivers. In optical, we continue to take share and remain the undisputed leader across virtually every domain, including metro, DWM, DCI, submarine, and long haul. During Q1, we added 11 new customers for WaveLogic 5 Extreme, bringing our total customer count to 270.
James E. Moylan: In fact, there are several key highlights from our Q1 performance that really illustrate the strength of these fundamental demand drivers in optical we continued to take share and remain the undisputed leader across virtually every domain, including Metro Dws, Dci submarine and loan.
James E. Moylan: Cole.
James E. Moylan: During Q1, we added 11, new customers for wave logic five extreme.
James E. Moylan: Bringing our total customer count to 270.
Gary B. Smith: And to date, we've shipped more than 115,000 WaveLogic 5e modems. Wave Server had a record quarter as well in Q1, with more than $250 million in revenue, reflecting a 34% growth year over year. Quarterly revenue doubled year-over-year for our reconfigurable line system, or RLS platform, with eight new customers in the quarter, bringing the total to nearly 70. And for our WaveLogic 5nano, 400ZR, and ZR plus pluggables, we gained 19 new customers in the quarter and now have a total of 86 total customers. Looking ahead in Optical, we're already taking orders for WaveLogic 6 Extreme, the industry's first and only 1.6 terabit solution, which will become generally available this summer. In fact, we've already announced two of these wins, Southern Cross and Vocus.
James E. Moylan: And to date, we've shipped more than 115000 wave logic Fyvie modems.
Wave server had a record quarter as well in Q1 with more than $250 million in revenue, reflecting a 34% growth year over year.
James E. Moylan: Quarterly revenue doubled year over year for a reconfigurable line system or Rls platform with eight new customers in the quarter, bringing the total to nearly 17.
James E. Moylan: And for our wave logic, five nano 400, ZR and ZR plus plug of bowls, we gained 19 new customers in the quarter and now have a total of 86 total customers.
James E. Moylan: Looking ahead in optical we're already taking orders for wave logic six extreme the industry's first and only one six terabits solution, which will become generally available this summer.
James E. Moylan: In fact, we've already announced two of these wins southern cross and bogus.
Gary B. Smith: Furthermore, WaveLogic 6nano, our next generation pluggables family, will feature products such as 800GZR in the latter half of calendar 2024. In routing and switching, where we've been making both organic and inorganic investments, we continue to execute our strategy to expand our TAM into faster growing markets. And in Q1, we had double-digit revenue growth year over year for the combination of our 3,000 and 5,000-series platforms. And our AT100 continues to gain traction as we scale our metro and coherent routing capabilities. And we now have more than 50 customers around the globe using this platform.
James E. Moylan: Further wave logic, six nano and next generation plug a bull's family will feature products, such as 800 gig ZR in the latter half of calendar 2024.
James E. Moylan: Yeah.
James E. Moylan: In routing and switching where we've been making both organic and inorganic investments we continued to execute our strategy to expand that tam into faster growing markets.
James E. Moylan: And in Q1, we had double digit revenue growth year over year for the combination about 3005 thousand series platforms.
James E. Moylan: And our 8100 continues to gain traction as we scale, our metro and coherent routing capabilities and we now have more than 50 customers around the globe for this platform.
Gary B. Smith: We continue to build momentum with this portfolio, including our Wave Router platform, of which we are building additional form factors to address a wider range of applications over time. Other portfolio highlights for Q1 include, notably, another very good quarter for platform software and services with 22% revenue growth year-over-year and 9% sequentially. We also saw 13% revenue growth year over year in our global services business, and this is most notable because it was driven by another strong quarter for installation and deployment, which really illustrates our role and visibility in helping our service provider customers work through some of their near-term absorption challenges. In summary, we delivered a strong performance in our fiscal first quarter. Our technology leadership position has never been better and will continue to improve.
James E. Moylan: We continue to build momentum with this portfolio, including a wave router platform of which we are building additional form factors to address a wider range of applications over time.
James E. Moylan: Other portfolio highlights for Q1 include notably another very good quarter for platform software and services with 22% revenue growth year over year and 9% sequentially.
James E. Moylan: We also saw 13% revenue growth year over year in our global services business and this is most notable because it was driven by another strong quarter for installation and deployment, which really illustrates our role in visibility and helping our service provider customers work through some.
James E. Moylan: Their near term absorption challenges.
James E. Moylan: Okay.
In summary, we delivered a strong performance in our fiscal first quarter, our technology leadership position has never been better and we will continue to improve.
Gary B. Smith: Our customer engagements remain focused on helping them meet the growing demand for bandwidth, digitally transform their operations, and monetize their networks faster, and, more recently, positioning them for the rise of AI and what it means for network infrastructure and operations. We remain very confident in the opportunities ahead and in the execution of our long-term strategy. With that, I'll turn it over to Jim. He'll provide details on the quarter's results as well as our business outlook, particularly in the context of the current service provider order dynamics that I referenced earlier. Thank you, Jim. Thanks, Gary. Good morning, everyone.
James E. Moylan: Our customer engagements remained focused on helping them meet the growing demand for bandwidth.
James E. Moylan: Digitally transform their operations and monetize their networks faster.
James E. Moylan: And more recently positioning them for the rise of AI and what it means to network infrastructure and operations.
James E. Moylan: We remain very confident in the opportunities ahead and in the execution of our long term strategy.
James E. Moylan: With that I'll turn it over to Jim who will provide details on the quarter's results as well as our business outlook, particularly in the context of the current service provider order dynamics.
James E. Moylan: Referenced earlier, thank you Jim.
James E. Moylan: Thanks, Gary Good morning, everyone.
James E. Moylan: As Gary stated, we delivered very strong fiscal first-quarter financial results. Total revenue in Q1 was $1.04 billion. Adjusted gross margin was 45.7%, reflecting a favorable product mix. Q1 adjusted operating expense was $337 million.
James E. Moylan: As Gary stated, we delivered very strong fiscal <unk> first quarter financial results.
James E. Moylan: Total revenue in Q1 was $1 4 billion.
James E. Moylan: Adjusted gross margin was 45, 7%, reflecting a favorable product mix.
Q1, adjusted operating expense was $337 million.
James E. Moylan: A bit lower due to delays in certain internal projects and lower sales incentive compensation. With respect to profitability measures, in Q1, we delivered strong results, including an adjusted operating margin of 13.2%, adjusted net income of $97 million, and adjusted EPS of 66 cents. In addition, we generated $266 million in cash from operations.
A bit lower due to delays in certain internal projects and lower sales incentive compensation.
James E. Moylan: With respect to profitability measures in Q1, we delivered strong results, including adjusted operating margin of 13, 2%.
James E. Moylan: <unk> net income of $97 million and adjusted EPS of <unk> 66.
James E. Moylan: In addition, we generated $266 million in cash from operations.
James E. Moylan: Adjusted EBITDA in Q1 was $160 million. Finally, we ended the quarter with approximately $1.5 billion in cash and investments. Inventory levels came down $66 million from Q4. And we repurchased approximately 690,000 shares for $32 million during the quarter.
James E. Moylan: Adjusted EBITDA in Q1 was $160 million.
James E. Moylan: Finally, we ended the quarter with approximately $1 5 billion in cash and investments.
James E. Moylan: Inventory levels came down $66 million from Q4.
James E. Moylan: And we repurchased approximately 690000 shares for $32 million during the quarter.
James E. Moylan: We are continuing to target the repurchase of $250 million in total during the year. As we turn to guidance, I want to reinforce a few points. Most important, the fundamental demand drivers of our business, including growth in bandwidth demand, remain very strong. Bandwidth demand has grown at 25-30% per year for decades, and with AI applications imminent, it shows no signs of slowing. We continue to grow our business and gain share with cloud providers in connection with their network expansion and data center infrastructure build out. And our deep relationships and engagements with service provider customers continue to position us well for opportunities across both optical and routing and switching domains.
James E. Moylan: We are continuing to target the repurchase of $250 million total during this during the year.
Speaker Change: As we turn to guidance I want to reinforce a few points. Most importantly, the fundamental demand drivers of our business, including growth in bandwidth demand remained very strong.
Speaker Change: Bandwidth demand has grown at 25% to 30% per year for decades, and with AI applications imminent shows no signs of slowing.
Speaker Change: We continue to grow our business and gain share with cloud providers in connection with their network expansion and data center infrastructure build outs.
Speaker Change: And our deep relationships and engagements with service provider customers continue to position us well and opportunities across both optical and routing and switching domains.
Speaker Change: However.
James E. Moylan: We remain in a period of uncertainty which has come about as a result of the whiplash effects on industry supply chains caused by shortages of key components, elongated lead times, huge orders by customers in response, and Inventory Bills of Networking Gear by our customers. They are working down this inventory, and things are getting better. However, it is taking longer than we and many in the industry anticipated for Tier 1 service providers in North America to work through these high levels of inventory, and this is impacting their placement of new orders. Additionally, we are seeing increased caution from certain European service providers related to macro concerns.
Speaker Change: We remain in a period of uncertainty, which has come about as a result of the whiplash effects on industry supply chains caused by shortages of key components elongated lead times.
Speaker Change: Huge orders by customers in response.
Speaker Change: And inventory builds of networking gear by our customers.
Speaker Change: They are working down this inventory and things are getting better.
Speaker Change: However.
Speaker Change: It is taking longer than we and many in the industry anticipated for tier one service providers in North America to work through these high levels of inventory and this is impacting their placement of new orders.
Speaker Change: Additionally, we are seeing increased caution from certain European service providers related to macro concerns.
James E. Moylan: All of this is largely consistent with what our customers, competitors, and suppliers have been reporting in recent weeks and months. We continue to believe that these dynamics are temporary and currently expect to see order improvement over the next few quarters. Taking all of these factors into consideration, we are adjusting certain elements of our annual guidance for fiscal 2024. We now expect revenue for fiscal 2024 to be in a range of $4.0 to $4.3 billion, down from our previous expectations of 1% to 4% growth over fiscal 2023. With respect to adjusted gross margins in fiscal 24, we continue to expect them to be in the mid-40s range, with some variability by quarter, for Adjusted Operating Expense.
Speaker Change: All of this is largely consistent with what our customers competitors and suppliers have been reporting in recent weeks and months.
We continue to believe that these dynamics are temporary and currently expect to see orders improvement over the next few quarters.
Speaker Change: Taking all of these factors into consideration we are adjusting certain elements of our annual guidance for fiscal 2024.
Speaker Change: We now expect revenue for fiscal 2024 to be in a range of 4.02.
Speaker Change: To $4 3 billion.
Speaker Change: Down from our previous expectations of 1% to 4% growth over fiscal 2023.
Speaker Change: With respect to adjusted gross margins in fiscal 'twenty four we continue to expect it to be in the mid Forty's range with some variability by quarter.
Speaker Change: For adjusted operating expense, we intend to continue investing strategically both to advance our leadership position in our key markets and to expand our addressable market in key growth areas.
James E. Moylan: We intend to continue investing strategically, both to advance our leadership position in our key markets and to expand our addressable market in key growth areas. However, taking into account our current revenue outlook for the year, we are now planning for operating expense to average $340 to $345 million per quarter in fiscal year 24, down from our previous guidance of $355 million per quarter. With respect to Q2, we expect to deliver revenue in a range of $850 million to $930 million, adjusted gross margin in the low 40 percent range, given expected product mix and lower volumes in the quarter, and Adjusted Operating Expense of approximately $340 to $345 million. Finally, we are updating our three-year financial targets. As a reminder, given the severity and duration of the rebalancing of supply and consumption, our fiscal 2023 was a year of outsized revenue growth, over 20 percent, and well above our historical growth rate of 6 to 8 percent.
Speaker Change: However, taking into account our current revenue outlook for the year. We are now planning for operating expense to average $340 million to $345 million per quarter in fiscal year 'twenty four down from our previous guidance of $355 million per quarter.
Speaker Change: With respect to Q2, we expect to deliver revenue in a range of $850 million to $930 million adjusted gross margin in the low 40 percentage range, given expected product mix and lower volumes in the quarter.
Speaker Change: And adjusted operating expense of approximately $340 million to $345 million.
Speaker Change: Finally, we are updating our three year financial targets.
Speaker Change: As a reminder, given the severity and duration of the rebalancing of supply and consumption. Our fiscal 2023 was a year of outsized revenue growth over 20% and well above our historical growth rate of 6% to 8%.
James E. Moylan: Our outlook today is that, for these same reasons, our fiscal 2024 revenue growth rate will be substantially lower than the historical rate. Given this revised view, using our updated fiscal year revenue outlook of $4-$4.3 billion as a baseline year, we believe that 6-8% CAGR best represents our long-term growth rate, and in a market growing low to mid-single digits percentage. Ciena's expected revenue growth rate will ensure continued market share gains. In summary...
Speaker Change: Our outlook today is that for these same reasons, our fiscal 2024 revenue growth rate will be substantially lower than the historical rate.
Speaker Change: Given this revised view using our updated fiscal year revenue outlook of four to $4 3 billion as a baseline year, we believe that 6% to 8% CAGR best represents our long term growth rate.
Speaker Change: And in a market growing low to single low to mid single digits percentage CN as expected revenue growth rate will ensure continued market share gains.
Speaker Change: In summary.
Operator: The industry is experiencing some near-term headwinds as our customers recover from the supply chain challenges that they've seen in recent years. Demand, though, continues to grow at at least the historical 25 to 30 percent annual rate. Underlying demand drivers of that, which now include AI, ensure that this will continue well into the future. Our leading technology and focus on growing our portfolio to address new markets, as well as our deep relationships with both service providers and cloud providers, position us extremely well to address the evolving network priorities of our customers. We expect to continue growing our market share and to deliver profitable growth over the long term. Dave, I'll turn the call now over to analysts for Q&A. We will now begin the question... To ask a question, you may press star, then 1. Sip, if at any time. This has been addressed, and if you would like, press star then. The first question comes from... The Bulletproof Executive 2013, with J.P. Moore. Unknown Attendee.
Speaker Change: The industry is experiencing some near term headwinds as our customers recover from the supply chain challenges that you've seen in recent years.
Speaker Change: And with demand, though continues to grow at at least the historical 25% to 30% annual rate.
Speaker Change: Underlying demand drivers of that which now include AI and ensure that this will continue well into the future.
Speaker Change: Our leading technology and focus on growing our portfolio to address new markets as well as our deep relationships with both service providers and cloud providers position us extremely well to address the evolving network priorities of our customers.
Speaker Change: We expect to continue growing our market share and to deliver profitable growth over the long term.
Speaker Change: Dave Let's turn the call now over to analysts for Q&A.
Speaker Change: We will now begin the question and answer session.
Speaker Change: A question you May Press Star then one on your Touchtone phone.
Speaker Change: You are using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: Our first question comes from.
Speaker Change: Cemig.
Cemig: <unk> with.
Cemig: With J P. Morgan. Please go ahead.
Cemig: Oh. Thank you thanks for taking my questions.
Unknown Attendee: Thank you. Thanks for taking the time to answer my questions. Maybe for the first one, if I could just ask for a bit more color on the order patterns you're seeing both on the telco and the web scale side. I mean, any color on the sequential order trends there? Because from the commentary in the Q2 guide, at least, it does appear like telco orders probably were a lot worse than you were expecting. But any more color there in terms of the magnitude of the sequential order trends between those two verticals? Unknown Attendee, Yeah, just Samik. Let me try to describe the dynamics here.
Cemig: Maybe for the first one if I can just ask for a bit more color on the order patterns, you're seeing both on the telco in the web scale side I mean.
Speaker Change: Any color on the sequential order trend there because from the commentary that Q2 guide it lease it does appear like telco orders probably were a lot worse than you were expecting but any more color. There in terms of the magnitude of the sequential order trends between those two verticals that you're seeing and I have a follow up thank you.
Yes, just.
Speaker Change: So Mike let me try to describe the dynamics here.
Unknown Attendee: We've just gone through Q1, which is, you know, historically a relatively low-orders quarter for us, but they came in about where we expected and are slowly improving. But the premise for our guide for this year was our view, based on everything we had heard at the time, that Tier 1 service providers would be working through their inventory at a faster rate and would begin to normalize their ordering patterns by Q2. That was the premise for our plan and for our guide. What's happening is that it is taking them longer to work through their inventories. There are all sorts of issues, too, with respect to fiber, with respect to site readiness, and with respect to labor.
Speaker Change: We've just gone through Q1, which is historically a relatively low orders quarter for us, but they came in about where we expected and are slowly improving.
Speaker Change: But the premise for our guide for this year was our view based on everything we had heard at the time.
Speaker Change: That tier one service providers would be working through their inventory at a faster rate and would begin to normalize our ordering patterns by Q2 that was our premise for our plan and for our guide what's happening is that it is taking them longer to work through their inventory.
There are all sorts of issues too with respect to fiber with respect to site readiness with respect to labor and all of this is causing them to take longer to work through the inventory that they have accumulated over the last year and a half.
Unknown Attendee: And all of this is causing them to take longer to work through the inventory that they have accumulated over the last year and a half. Let me make it clear, though, that they are working down their inventory, and things are getting better. We do expect higher orders in Q2, but we do not think now that they're going to be at the level that would enable us to reach our Q2 guide and our full year guide. So that's what's happening. In Europe, it's really at the edges, but clearly, the macro situation in Europe is not strong.
Speaker Change: Let me make it clear, though that they are working down their inventory and things are getting better we do expect higher orders in Q2, but we do not think now that theyre going to be at the level that would enable us to reach our Q2 guide and our full year guide so that's what's happening.
Speaker Change: In Europe, it's really at the edges, but clearly the macro situation in Europe has is not strong and we're just seeing lower orders and expect to see orders from them for the year.
Unknown Attendee: And we're just seeing lower orders and expect to see lower orders from them for the year. Samik, to your point on the cloud, that sort of contrast with the cloud, which, you know, you saw the numbers in Q1, we were up 38%. You know, year over year, we expect to see that continue to be strong throughout and good order flows throughout the year. Obviously, we've grown tremendously there.
Cemig to your point on the cloud sort of contrast, with the cloud, which you saw the numbers in Q1, we were up 38%.
Speaker Change: Year over year, we expect to see that continue to be strong throughout and good order flows throughout the year. Obviously, we've grown tremendously there owns 50 odd percent growth last year, we're not going to see that kind of growth, but we're going to have a very solid year in the web scale.
Unknown Attendee: I think it's 50-odd percent growth last year. We're not going to see that kind of growth. But, you know, we're going to have a very solid year on the web scale. And for my follow-up, if I can just clarify, Jim, your comments about Unknown Attendee Long-term growth guide prior quarter. I think the previous guide was for fiscal 24 to 26 to be six to eight.
Speaker Change: Okay got it and for my follow up if I can just clarify Jim your comments about the.
James E. Moylan: Long term growth guide prior quarter I think the previous guide was for fiscal 'twenty four to $26 six to eight I didn't exactly it seemed like you were sort of reiterating that guide, but I didnt exactly capture what youre trying to imply in the updated long term guide that you provided.
Unknown Attendee: I didn't exactly understand it seemed like he was sort of reiterating that guide, but I didn't exactly capture what you're trying to imply in the updated long-term guide that you provided. Yeah, if you think about what we said at the beginning of the year, we said 68 over three years, and that was, you know, starting off with a lower growth rate in 24, which implied perhaps a slightly higher growth rate in later years. We're now saying that if you're doing a three-year forecast for us, you should take fiscal 24 as your base and assume a growth rate of 68%. Now, that sounds like a guide. We're not trying to guide for 25 right now.
Speaker Change: Yeah.
Speaker Change: Yeah. If you think about what we said at the beginning of the year, we said six to eight over three years and that was.
Speaker Change: Starting off with a lower growth rate in 'twenty, four which would imply perhaps a slightly higher growth rate in the later years. We're now saying that you should if youre if youre doing a three year forecast for US you should take fiscal 'twenty four as your base.
Speaker Change: And assume a growth rate of 6% to 8% now.
Speaker Change: That sounds like a guide we're not trying to guide for 'twenty five right now where it could well be better than that we hope it will be but we think for modeling purpose. Its as good a guess as any.
Unknown Attendee: It could well be better than that. We hope it will be, but we think for modeling purposes, it's as good a guess as any. Thank you. The next question comes from Daryani with Everett. Let's go, eh? Good morning.
Speaker Change: Okay got it thank you.
Speaker Change: The next question comes from Amit.
Amit: <unk> <unk> with Evercore. Please go ahead.
Okay. Good.
Amit Jawaharlaz Daryanani: Thanks for taking my questions as well. You know, I guess maybe to start with, the updated guide at this point sort of implies that, you know, you have a very steep ramp in the back half of the year for Q3 and Q4, I think almost implying like mid-team sequential growth for the back half. Can you just talk about what gives you the confidence that you can get that kind of growth given, you know, the downtick you just saw from your telco customers? And then, maybe, maybe an extension of this, if the orders from these telco customers don't materialize the way you expect, is the risk more that you have the low end of the guide? Or what do I think of that? Yeah. Hi Amit.
Amit: Good morning, Thanks for taking my questions as well I guess, maybe to start with the.
Amit: Updated guide at this point sort of implies that you'll have a very steep ramp in the back half of the year for Q3, and Q4 I think it almost implying like mid teens sequential growth for the back half can you just talk about what gives you the confidence that you can get that kind of growth given the downtick you just hopefully with telco customers and then maybe an extension of this it's the orders from there.
Amit: Telco customers don't materialize. The way you expect is the west more that you're at the low end of the guide or how do I think of that dynamic as well.
Speaker Change: Yes, Hi, Matt Yeah.
Gary B. Smith: Yes, it's clearly a step function into the second half that we actually thought we'd start in Q2. We are seeing the orders, as Jim said. This is not some sort of binary event.
Speaker Change: Yes, it's clearly.
Speaker Change: Step function into the into the second half that we actually thought we would start in Q2.
Speaker Change: We're seeing the orders as Jim said this is not a sort of binary event.
Gary B. Smith: We are seeing progress in the absorption, inventory going down, and we are seeing a gradual increase in service provider orders. That sort of gives us confidence, and obviously, we have deep partnerships with these guys, and we're installing some of the equipment as well, particularly in North America, where we have insight into it. I think the other dynamic that we're in a better position now is that people have released their budgets, and their budgets really haven't changed, as I think most people have seen. CAPEX has not changed at all amongst most of the major carriers for this year, and their intent is absolutely there.
Speaker Change: We are seeing progress in the absorption inventory going down and we are seeing a grudge.
Speaker Change: Gradual increase in the service provider does that sort of gives us confidence and obviously we.
Speaker Change: We have deep partnerships with these guys and we're installing some of the equipment as well so, particularly in North America, where we have insight into it.
Speaker Change: I think the other dynamic.
Speaker Change: We're in a better position now is people have released their budgets.
Speaker Change: And our budget is really havent changed as I think most people have seen capex is not.
Speaker Change: Changed at all amongst most of the major carriers for.
Speaker Change: This year and their intent is absolutely there, but what we've got greater insight into now is the planning and timing of those installations as we've turned the budgets have been released we're now sitting in early March.
Gary B. Smith: But what we've got greater insight into now is the planning and timing of those installations. As we have turned the year, the budgets have been released, and we're now sitting in early March.
Speaker Change: We do have a better visibility into it than we did in its not us.
Gary B. Smith: We do have better visibility into it than we did, and it's not as much of a step function, if you will, Amit, as we'd anticipated before. And that's where we've best reflected the change in the guide. Got it. That's really helpful.
Speaker Change: It's not as much of a step function. If you will emerge as weak as we had anticipated before.
Speaker Change: Before.
Speaker Change: And that's where we've best.
Speaker Change: Best reflected the change and the change in the guide.
Speaker Change: Got it that's really helpful. And then if I could just follow up cloud continues to perform extremely well for you folks.
Speaker Change: There's an element of some of the AI demand that's on the come into your numbers right now.
Gary B. Smith: And then, if I can just follow up, the cloud continues to perform extremely well for you folks. You know, what is an element of some of the AI demand that's starting to come into your numbers right now? Or do you think the AI opportunity is still much more of a future narrative, but it's not impacting numbers right now? Let's just understand what's driving the cloud trend and if AI, if you're starting to see some AI benefits. You know, I would say we're not really seeing the, you know, now there is some AI traffic, you know, with the various offerings, you know, Gemini, etc., GPT that's out there. So that is generating some traffic, but obviously not an appreciable step function.
Speaker Change: The AI opportunity is still much more for future narrative, but it's not impacting the numbers right now, let's just understand what's driving the cloud threat and if AI.
Speaker Change: And we see some benefit already.
Speaker Change: I would say, we're not really seeing the.
Speaker Change: There is some AI traffic with the various offerings Gemini et cetera.
Speaker Change: GPT that's out there so that is generating some traffic, but not obviously not an appreciable step function I think.
Speaker Change: Our understanding with these guys is that sold to come really about how they monetize the broader dimensions of AI are investing massively right now as we all know and in compute.
Speaker Change: And figuring out how to then released that for monetization, which will then flow into the network. So what we're seeing is just basically business as usual cloud growth. I think you are seeing an acceleration of that you've seen the SaaS companies do well is another sort of.
Gary B. Smith: I think, you know, our understanding with these guys is that it's all to come really about how they monetize the broader dimensions of AI. They're investing massively right now, as we all know, in compute, and figuring out how to then, you know, release that for monetization, which will then flow into the network. So what we're seeing is just basically, you know, business as usual cloud growth. I think you are seeing an acceleration of that. You've seen the SaaS companies do well as another sort of, you know, gauge of that. And I think we're seeing very robust, we saw it last year, you know; we were massively involved in network deployments with these guys. And that was really the cloud.
Speaker Change: Gauge of that and I think we're seeing very robustly so late last year.
Speaker Change: Massively in network deployments with these guys and that was really cloud.
Speaker Change: I don't think youre seeing virtually any of the AI step.
Speaker Change: Step function that we're all anticipating.
Speaker Change: And those numbers yet.
Speaker Change: Great. Thank you.
Thanks, Amit.
Speaker Change: Our next question comes from Tal Leone with Bank of America. Please go ahead.
Tal Leone: Yes, hi, guys.
Tal Leone: So.
Tal Leone: How do we know that what we're seeing here in in service providers is north.
Tal Leone: Structural.
Gary B. Smith: You know, I don't think you're seeing virtually any of the AI, you know, step function that we're all anticipating in those numbers yet. Great, thank you. Thanks so much.
That it's your in your comments you were talking about cyclical downturn that will recover absorption of inventory.
Tal Leone: When you talk to the carriers they talk about a permanent decline in spending their desire to spend less.
Tal Liani: The next question comes from Tal Liani with Bank of America. Go ahead. Yes. Hi, guys. How do we know that what we're seeing here in service providers is not? Unknown Attendee, Alexander Henderson, Ruben Roy, Samik Chatterjee, David Vogt, Karan Juvekar, Gregory Mesniaeff, Ciena Corp.
Tal Leone: Are there any parts of their spending that could be more structurally down that could be replaced by something else or do you have.
Tal Leone: Really confidence that this is just cyclical.
Tal Leone: Yes.
Speaker Change: It's a good question and obviously one that we're super focused on.
Unknown Attendee: When you talk to the carriers, they talk about a permanent decline in spending, their desire to spend less. Are there any parts of their spending that could be more structurally down, that could be replaced by something else, or do you really have confidence in that? Yeah, Tal, it's a good question and obviously one that we're super focused on. I would separate it out.
Speaker Change: I would separate it out I would say North America I do not believe there is a structural sort of issue to it it's really about absorption that capex.
Speaker Change: Their intent is actually to spend more and absorbed more and I think with all the major service provided that is their intent they want to catch up with the network builds I do think.
Speaker Change: There is a reticence around five <unk>, obviously, it's not been the monetization event for many carriers around the world that was anticipated and I do think theres, a curtailing of that spend in which my.
Gary B. Smith: I would say in North America, I do not believe there's a structural sort of issue with it. You know, it's really about absorption, their capex, you know, what they want. Their intent is actually to spend more and absorb more. And I think with all the major services provided, that is their intent. They want to catch up with their network builds. I do think that there is a reticence around 5G, obviously, you know; it's not been the monetization event for many carriers around the world that was anticipated. And I do think that, you know, there's a curtailing of that spending, which, you know, my own personal belief, I think is, is structural.
Speaker Change: My own personal belief I think is structural.
Speaker Change: I do not think that will have a major impact on the transmission and infrastructure build I mean, they are very focused on access and the build out there in North America. So I think in total to it I do not think there is a structural issue notwithstanding my comments about <unk> Europe.
Speaker Change: I would think a little bit differently on I think they have some inherent structural challenges that you have 180 carriers in Europe, you have some tiny jurisdictions with multiple carriers makes no economic sense.
Speaker Change: And I do think that a youre seeing a bit of a downturn in the economy.
Gary B. Smith: You know, I do not think that will have a major impact on the, you know, transmission and infrastructure build. I mean, they're very focused on access and the build out there in North America. So I think, you know, in total, I do not think there's a structural issue, notwithstanding my comments about 5G. But I would think a little bit differently about 5G. I think they have some inherent structural challenges there. You have 180 carriers in Europe. You have some tiny jurisdictions with multiple carriers. It makes no economic sense.
Certain key countries like Germany, which is hugely influential in Europe.
Speaker Change: And I think they are more.
Speaker Change: Receptive to those kinds of challenges than the North American model, where the economy continues to do well. So I think there are some structural issues associated with the European piece and that's.
Speaker Change: That's not new news, but they are more sensitive to the economic challenges in India. We think is still going up into the right, they're going to continue to build out their.
Speaker Change: Networks, we had a big year within the last year, we're going to be sort of flattish with them. This year, but India is going to be a great place for us for a long time.
Gary B. Smith: And I do think that A, you're seeing a bit of a downturn in the economy in certain key countries like Germany, which is hugely influential in Europe. And I think they are more, you know, receptive to those kinds of challenges than the North American model, where the economy, you know, continues to do well. So I think there are some structural issues associated with it with the European piece.
We're not seeing any of that in Asia Pacific.
Speaker Change: <unk> and <unk>.
Speaker Change: But one thing I would say Taylor is the driver for our business as demand for bandwidth and that has grown and continues to grow at very rapid rates now the people who are building networks to manage that demand really the structure has somewhat changed toward the cloud providers. If you go back 10 years.
Gary B. Smith: And that, you know, that's not new news, but they are more sensitive to the economic challenges. And India, we think is still going up. They're going to continue to build out their networks. We had a big year with India last year; we're going to be sort of flattish with them this year.
Speaker Change: They weren't buying any network here they are buying.
Speaker Change: Significant part of it today, it's very possible that that could expand overtime. If there is any shift that would be the shift from service provider to cloud providers.
Speaker Change: In the long haul.
Speaker Change: Great. Thank you.
Gary B. Smith: But India is going to be a great place for us for a long time. We're not seeing any of that in Asia Pacific, either, either that sort of uncertainty. Yeah, the one thing I would say, Tal, the driver for our business is demand for bandwidth, and that has grown and continues to grow at very rapid rates. Now, the people who are building networks to manage that demand, really, the structure has somewhat changed toward the cloud providers. You know, if you go back 10 years ago, they weren't buying any network gear; they're buying, you know, a significant part of it today. It's very possible that that could expand over time. If there's any shift, that would be the shift from service provider to cloud provider. Certainly in the long haul... The next question comes from Simon Leopold with Ramey. Go ahead. Yeah, I think it's Jeff.
Taylor: Thanks, Paul.
Taylor: Next question comes from Simon Leopold with Raymond James. Please go ahead.
Simon Matthew Leopold: Yeah, Thanks, Jeff co GM for assignment.
Simon Matthew Leopold: So I was just hoping you can maybe hash out the strength in Europe, this quarter and maybe how that.
Simon Matthew Leopold: That reconciles with your comments on it.
Simon Matthew Leopold: In the weeks, maybe the weakening macro outlook there.
Simon Matthew Leopold: As well as like Huawei swaps are displacement opportunity.
It sounds like it's going really well in India.
Speaker Change: Thank you.
Speaker Change: Yes ill deal with the first part.
Speaker Change: Our regional reporting reflects the region into which we deliver equipment it doesn't necessarily reflect the type of customer.
Speaker Change: So the.
Speaker Change: Big jump in deliveries into Europe were driven by cloud providers not the service providers in Europe.
Speaker Change: On the Huawei thing.
Speaker Change: There's still an opportunity ahead for now the whole supply chain and Covid situation.
Speaker Change: It was actually a benefit to Huawei, because they had gear.
Simon Matthew Leopold: This quarter. Unknown Attendee, How that wrecking child is. Macro Outlook there, as well as, you know, Huawei, really well. Yeah, I'll deal with the first part. Our regional report reflects the region into which we deliver equipment, but it doesn't necessarily reflect the type of customer. So the... The big jump in deliveries into Europe was driven by cloud providers, not the service providers in Europe, and to stick with the status quo of great, great. I appreciate it.
Speaker Change: Service providers really wanted to stick with the status quo that didn't necessarily want to build out stuff and so for a combination of those two reasons Huawei.
Speaker Change: <unk> pretty well over the last two years, the desire of western economies to reduce their dependence upon China in general and Huawei in particular has not abated and we think that once we get through all of this.
Speaker Change: Dynamic of supply chain and everything else that happened over the last few years their desires will events themselves in subs.
Speaker Change: Substitution of Huawei, we're seeing it in some places already and the Nordics in particular and some places in southern Europe, but we think it's going to continue.
Speaker Change: Great Great I appreciate it my for my follow up we are getting.
Unknown Attendee: For my follow-up, you know, we are. There's been a lot of noise, but... Now. Maybe it's just how was, how that can be cost effective. Transcribed by https://otter.ai. Signing that out.
Speaker Change: Theres been a lot of noise, but rather around the intra data center opportunity for coherent technology, maybe you could just help us understand.
Speaker Change: How that can be cost effective.
Speaker Change: When it will be cost effective.
Speaker Change: Think about the timing there.
Speaker Change: <unk> of that opportunity for you guys.
Unknown Attendee: Yeah, a way to think about it is, you know, as the flow rates between GPUs increase, and as the distances between them increase as they're forced to because of, you know, constraints like power. A lot of the techniques that were used in the WAN part of the network that brought Coherent to the forefront will replay themselves inside the data center, and some of the leaders in Coherent, we being the market leader there, are going to have opportunities to use our technology in that adjacent market. Now, from a timing perspective, I think you're looking at the next generation, which is probably 2025 and beyond, to get in there.
Speaker Change: Thank you.
Yes, the way to think about it is as the flow rates.
Speaker Change: Between Gpus increase.
Speaker Change: And as the distances increase as they are forced to because of constraints like power.
Speaker Change: A lot of the techniques that were used in the land part of the network that brought coherent to the forefront.
Speaker Change: We will replay themselves inside the data center.
Speaker Change: And some of the leaders in coherent we being the market leader there are going to have opportunities to use our technology in sort of that adjacent market now from a timing perspective, I think youre looking at sort of the next generation, which is probably 2025 and beyond.
Unknown Attendee: The consumption models will be quite different than the system business on the LAN, but the key fundamental technologies are the same things that we've been working in the Coherent space over multiple generations. Great. Yeah, I think, here and it's been put out. Unknown Attendee, Yeah, at this point, I think it's a little early to try to size how that slices off.
Speaker Change: To get in there the consumption models will be quite different than the system business on the land, but the key to be a key fundamental technologies are the same things that we've been working in in the coherent space over multiple generations.
Speaker Change: Great, Yes, I think.
Speaker Change: Coherent put out a forecast for datacom transceivers can be like.
Speaker Change: $15 billion by 2028 is there a percentage that you would put that could be coherent.
Unknown Attendee: There's obviously a, you know, if you're coming at it from the existing generation of technology, you're trying to extend the life of that technology as long as you possibly can. And then, you know, the substituted technology that we're talking about here is obviously trying to intercept where that saws off. I think it's still a bit of a crystal ball. Just to be clear, we do have a development track to develop those kinds of products on our R&D roadmap, and we are talking with major data center providers. So we're going to stay right on top of it. And when and if the shift occurs, we're going to be a part of it, we hope. Thanks, guys. The next question comes from Meta Marshall with Morgan. Great, thanks for taking the question. I wanted to dig into Europe a little bit.
Speaker Change: Yes at this point I think it's a little early to try to size how that slices off there's obviously a if you are coming at it from the existing generation of technology. You are trying to extend the life of that technology as long as you possibly can.
Speaker Change: And then the substitute technology.
Speaker Change: <unk> about here.
Speaker Change: Obviously trying to intercept where that saw us off I think is still a bit of a crystal ball.
So just to be clear, we do have development traction develop those kinds of products in our R&D roadmap and we are talking with major data center providers.
Speaker Change: We're going to stay right on top of it and when and if the shift occurs we're going to be a part of it we hope.
Speaker Change: Thank you alright, thanks, guys.
Meta A. Marshall: The next question comes from meta Marshall with Morgan Stanley. Please go ahead.
Meta A. Marshall: Great. Thanks for taking the question.
Meta A. Marshall: I wanted to dig into Europe, a little bit I know in the past maybe some of that European telco spend was actually kind of indirect cloud spend.
Meta A. Marshall: I know in the past, maybe some of that European telco spin was actually kind of indirect clouds. Unknown Attendee You know, as they kind of helped with data center builds for some of those customers. And so just wanted to get a sense of kind of whether any of the weakness you're seeing is kind of on the indirect part and if any of that's just due to kind of the Power Constraints that we're hearing about in kind of building out data centers or just any commentary there on kind of the indirect portion. And then maybe this is a follow-up question. Just as, you know, Jim, on how much you plan to kind of work down inventory levels across the year would be helpful. Hi Meta.
Meta A. Marshall: Yes.
Meta A. Marshall: Kind of helped.
Meta A. Marshall: With data center builds for some of those customers and so I just wanted to get a sense of kind of.
Meta A. Marshall: If any of the weakness youre seeing is kind of on the indirect part and if any of that's just due to kind of.
Power constraints that we're hearing about and kind of building out data centers or just any commentary there on kind of the the.
Meta A. Marshall: The indirect portion and then maybe just as a follow up question.
Meta A. Marshall: Just as you know.
Meta A. Marshall: Jim on how much you plan to kind of work down inventory levels across the year would be helpful. Thanks.
Speaker Change: Hi, Matt.
Gary B. Smith: Yeah, there is, you know, there has been a shift over a few years where, particularly, cloud providers used wholesale-type capacity in Europe. Increasingly, in the last sort of couple of years, they've been going direct and taking dark fiber. And I think that has, you know, impacted some of the service providers, particularly the wholesalers. And obviously, we've been, they come direct to us as opposed through the carrier. So I think you have seen that dynamic, particularly in Europe. That's not the case in most other, you know, international jurisdictions where you've got, you know, regulatory issues and the rest of it. So, it's, you know, much more of a hybrid in other countries, such as India.
Speaker Change: Yes.
James E. Moylan: There has been a shift over a few years, where particularly the cloud providers used wholesale type capacity in Europe increasingly in the last sort of couple of years, they've been going direct and taking dark fiber and I think that has.
James E. Moylan: Impacted some of the service providers, particularly the wholesalers I mean, obviously when they.
James E. Moylan: They come direct to us as opposed through through the carrier. So I think you have seen that.
James E. Moylan: Dynamic, particularly in Europe.
James E. Moylan: That's not the case in most other <unk>.
International jurisdictions, where you've got regulatory issues.
James E. Moylan: And the rest of it so it's much more of a hybrid in other countries such as India.
Gary B. Smith: But I do think that has impacted somewhat. Some of the wholesale capacity in Europe is now going directly into the hyperscalers. On the inventory question, Meta. We said that we were going to improve and reduce our inventory this year, and we will. As you saw, we reduced our inventory by $66 million in Q1. And we've slowed the rate of material into our system to match our demand forecast, so we are confident we're going to take our inventory down this year. But because Q2 is going to be a bit lower than we expect, and the rest of the year a bit lower as well, we're probably not going to get down as low on inventory as we said we would. I think we said we were going to get it down by $300 million or something like that. And I think we'll get it down by a couple of hundred million. I would think
But I do think that has impacted somewhat some of the wholesale.
James E. Moylan: Capacity in Europe is now direct into the Hyperscale is.
James E. Moylan: On the inventory question.
James E. Moylan: We said that we were going to improve and reduce our inventory level. This year and we will as you saw we reduced our inventory by $66 million in Q1.
James E. Moylan: And we've slowed the rate of material into our system to match our demand forecast. So we are confident we're going to take our inventory down this year.
James E. Moylan: <unk> Q2 is going to be a bit lower than we expect in the rest of the year a bit lower as well, we're probably not going to get down as low on inventory as we said we would I think we said, we're going to get it down by $300 million or something like that and I think we'll get it down by a couple of $100 million.
James E. Moylan: But I think, on the other hand, it might grow in Q2 because the situation is a little bit late-breaking for us, and we can't react to it quickly enough. But we will drive inventory down for the year by at least a couple of hundred million. Great. The next question comes from George Notter with Jessica.
James E. Moylan: I would think but I think on the other hand, it might grow in Q2, because the situation is a little bit late breaking for us and we can react to it quickly enough, but we will drive inventory down for the year by at least a couple hundred million dollars.
Speaker Change: Alright, thank you.
Speaker Change: The next question comes from George Notter with Jefferies. Please go ahead.
George Charles Notter: Hi guys, thanks very much. I guess I'm curious about where your product lead times are right now. I'm wondering if product lead times are quite short, and that's leading to some of the excess inventory taking longer to bleed off. Can you just talk a little bit about that dynamic lead times versus buffer stocks at customer? George, lead times, we have a very broad portfolio, so lead times vary. But if you wanted to, you know, put a single number on it, we sort of have published 12-week lead times for our customers. The reality is, as we've executed through Q1, we are executing at a much better rate than that in terms of lead times; we're approaching getting back to sort of pre-pandemic lead times, not quite there yet, but approaching getting back to that. And I think that does have an impact in terms of our customer order behavior patterns, as they, you know, if they don't need to place an order with a 52-week lead Got it. And then I'm sorry. What are the normal pre-pandemic lead times also?
George Charles Notter: Hi, guys, thanks very much.
George Charles Notter: I'm curious about where your product lead times are right now.
George Charles Notter: I'm wondering if.
George Charles Notter: Product lead times are quite short and that's that's leading to some of the excess inventory.
George Charles Notter: Taking longer to bleed off can you just talk a little bit about that dynamic lead times versus a buffer stocks at customers.
And George lead times.
George Charles Notter: We have a very broad portfolio, so lead times vary, but if you wanted to.
Number on it we sort of have published 12 week lead times to our customers. The reality is.
George Charles Notter: As we've executed through Q1.
George Charles Notter: We are executing at a much better rate than that in terms of lead times were approaching getting back to sort of pre pandemic.
George Charles Notter: Lead times, not quite there, yet, but approaching getting back to that and I think that does have an impact in terms of our customer order behavior patterns.
If they don't need to place it with 52 week lead time, theyre not going to place it with 52 week lead time.
Speaker Change: Got it and then I'm sorry.
Speaker Change: Normal pre pandemic lead times were what range also turning on the parts or any other portfolio for us. So it was mid single digits for weeks.
Unknown Attendee: Depending on the portfolio for us, it was mid single digits for weeks, depending on the product line. Okay, and do you think it's the case that... It sounds like the issue is mostly North America. Is it broad-based across North America, or is it more concentrated around a handful of companies? I would say it is North America.
Speaker Change: Depending on the product line.
Speaker Change: Got it Okay and do you think it's the case that.
Speaker Change: Customer inventories are.
Speaker Change: As issue it sounds like the issues, mostly North America is it broad based across North America or is it more concentrated around a handful of customers.
I would say it is it is north America is one or two examples internationally, but.
Gary B. Smith: It's one of two examples internationally, but you know, they're not super meaningful to this conversation. I think it's mainly North America, and it's mainly the tier ones. But it is sort of a shared challenge across most of the larger carriers in North America, who obviously tried to get out ahead of the whole supply chain piece. But now you've got this dynamic where we and other vendors are turning up with enormous amounts of equipment. I mean, I think we shipped 24% more equipment last year than we did the prior year. And you think about all those trucks turning up at the same time with a bunch of other vendors to put the system together. And that's causing the challenges around their capacity and all the various facets of people, storage, logistics, fiber availability, et cetera, to recur.
Speaker Change: It's not super meaningful to this conversation.
Speaker Change: It's mainly North America, and it's mainly the tier ones.
Speaker Change: It is it is sort of shed challenge across most of the larger carriers in North America have obviously tried to get out ahead of the whole supply chain piece, but now you've got this dynamic where we and other vendors are turning up with enormous amounts of equipment.
Speaker Change: We shipped 24% more equipment last year than we did the prior year.
Speaker Change: And you think about all those trucks turning up at the same time with a bunch of other vendors to put the system together.
Speaker Change: What's causing the chat.
Speaker Change: Challenges around their capacity in all the various facets of people storage logistics fiber availability etcetera to backup.
Gary B. Smith: And I, you know, it's just taken longer than we all, including them, would like or anticipate. And to your earlier point, George, until we kind of move down that path, and particularly with reduced lead times, it's super logical as to why we see the orders being what they are. They are improving, and we are seeing the deployment. But, you know, I want to stress that this is not a sort of binary event. We're seeing improvements in absorption.
Speaker Change: And.
Speaker Change: It's just taken longer than we all including them.
Speaker Change: We would like or.
Anticipate and to your earlier point.
Speaker Change: Until until we kind of move down through that path and particularly with reduced lead times.
Speaker Change: Super logical as to why we see the orders being what they what they are they are improving and we are seeing the deployment, but I want to stress that this is not a sort of a binary event.
Speaker Change: We're seeing improvements in absorption the inventories are coming down.
Gary B. Smith: The inventories are coming down. We're seeing an increase in orders from service providers. It's just not the step function I think we collectively anticipated.
Speaker Change: We're seeing an increase in orders and service providers. It's just not the step function I think we collectively anticipated.
Gary B. Smith: And to be clear, in this context, we're referring not just to telecom service providers but also to MSO services. Yeah, I'd include cable in there too, yeah. Thank you, guys.
Speaker Change: And to be clear.
Speaker Change: In this context, we're referring not just to telecom service providers, but Msos service I would include cable in there too.
Speaker Change: Alright, Thank you guys.
Speaker Change: George.
Our next question comes from Michael.
Michael: <unk> with Rosenblatt Securities. Please go ahead.
Michael Edward Genovese: The next question comes from Mike, Genovese with Rosenblatt. Oh, great. Thanks.
Michael: Oh, great. Thanks, I wanted to follow up on the last question.
Michael: Because.
Michael Edward Genovese: You know, I wanted to follow up on the last question because I, you know, I understand mostly what you're talking about with these North American service provider challenges, but the comment on fiber availability. Refresh that out a little bit more, struggling to come up to speed with what that means. Michael, you probably can appreciate the majority, like the big builds and equipment consumptions are when people are putting down new routes or lighting new fibers. The process of procuring those fibers, even though everybody has intentions to put more fiber in the ground, as North American customers have announced, there's a process of construction there, and it takes time. And I think it's exasperated by the labor market in North America as well. So getting access to the fiber, the tension is there, the timing is taking longer, going through the characterization of that fiber, and then finally doing the construction to light it.
Michael: I understand.
Michael: Mostly what you are talking about with these north American service provider challenges, but the the.
Speaker Change: The comment on fiber availability could you flesh that out a little bit more.
Speaker Change: Struggling to come up to speed with what that what that means.
Speaker Change: And Michael you probably can appreciate.
Speaker Change: The majority of the <unk>.
Speaker Change: Builds in.
Equipment Consumptions are when people are putting down new routes or lighting new fibers.
Speaker Change: The process of procuring those fibers, even though everybody has intentions to.
Speaker Change: Put more fiber in the ground.
Speaker Change: North American customers have announced there is a process of construction there and it takes time and its I think is exasperated by the labor market in North America, as well, so getting getting access to the fiber tension as their timing is taking longer.
Speaker Change: Going through characterization of that fiber and then finally doing the construction delighted it's just taking longer than we had anticipated with the volume that they're trying to do they're working through it because.
Our visibility to it and where we can help our customers is on our installation services and you can see that is up.
Speaker Change: Period over period quite substantially it is happening, it's just taking longer than we anticipated going into the year.
Speaker Change: Okay, Great and then I guess my next question.
Speaker Change: Yes, just the competitive environment.
Speaker Change: GCI when it seems like you've maintained very high level of market share in Dci.
Speaker Change: As.
Speaker Change: ZR has become more important.
Speaker Change: Are you finding a different set of competitors in the market.
Speaker Change: How is the competitive environment changed.
Recently in Dci if at all.
Speaker Change: Yes, I think.
Speaker Change: Two different views of it I guess.
Speaker Change: The <unk> impact.
Unknown Attendee: It's just taking longer than we had anticipated with the volume that they're trying to do. They're working through it. Our visibility to it and where we can help our customers is in our installation services. And you can see that it is up period over period quite substantially. It is happening. It's just taking longer than we anticipated going into the year. Okay, great.
Speaker Change: Has not impacted our business at all in fact, you can see.
Record quarters for wave server in our Q1 2024 results.
Speaker Change: Massive massive wave serving that's all Dci for the most part all Dci So it's clearly not impacting our business.
Speaker Change: Some people may have impacted our business with the web scale.
Speaker Change: Like 57% year on year.
Unknown Attendee: And then I guess my next question. I, you know, just the competitive environment. P.I.
Speaker Change: <unk>.
Speaker Change: For 2000 and last year for 2023.
Speaker Change: So again, the big parts of that as various different flavors of datacenter interconnect.
Unknown Attendee: Seems like you've made it, a very high level of market share in DCI, as ZR has. Unknown Attendee, are you finding a different set of competitors in the market? Or, you know, how is the competitive environment changing? www.globalonenessproject.org. Yeah, I think, you know, two different views of it, I guess, the ZR impact.
So clearly not having a negative impact there and in fact I think you can do those do the math on the market the market size Youll conclude that we gained share.
Speaker Change: With the <unk> last year.
Speaker Change: In terms of the number of competitors from a from a plausible perspective, yes, you start to get different sort of consumption models at the end of the day.
Speaker Change: It's still a very limited number of folks that are investing in the key technologies that go into these ZR plugs.
Speaker Change: <unk> different ecosystems that are trying to put them together.
Speaker Change: I'm a firm believer from from a philosophy perspective, if you don't own some of the core technologies, you are probably not long for that world.
Unknown Attendee: P palette touchstone – Sudeepint, Polly.............................................. shocking past uneducated New Young Competitors, Own and Control, Our Own Destiny, and all those key technologies. And just to be clear, we have roughly 50% market share globally, with web scale companies. If you take out that which Huawei does, which is just about entirely in China, then it gets to be a bit higher than that. So we're very comfortable with our share position. And we think it's going to remain at that level, probably hard for us to gain share from this point because they all want a second source, but we'll take 50% plus. All right, thanks so much. Thanks Mike, from ALEC, with Needham. Please go ahead.
Speaker Change: But that will take some time to play out and as you know we own.
Speaker Change: Own and control our own destiny and all of those key technologies.
Speaker Change: And just to be clear we have.
Speaker Change: Roughly 50% market share globally with <unk>.
With web scale companies, if you take out that which Huawei does which is just about entirely in China, then it gets to be a bit higher than that so we're very comfortable with our share position.
Speaker Change: And we think it's going to remain at that level, probably hard for us to gain share from this point because they all want a second source, but we will take 50% plus.
Speaker Change: Thanks, so much.
Speaker Change: Thanks, Mike.
Speaker Change: The next question comes from Alex Henderson with Needham. Please go ahead.
Alexander Henderson: Great. Thanks.
Alexander Henderson: I was hoping we could talk a little bit about that.
Alexander Henderson: The mix between product and service in the 24.
Unknown Attendee: I think we could talk a little bit about... product. Unknown Attendee, I realize that Unknown Attendee, Alexander Henderson, Gregory Mesniaeff, Ciena Corp. Unknown Attendee, Alexander Henderson, Gregory Mesniaeff, Ciena Corp., and therefore. $20 million. Unknown Attendee. How does that play out?
Alexander Henderson: Expectations.
Alexander Henderson: I realize that.
Alexander Henderson: <unk> was up quite a bit in the January quarter, but it was actually down significantly quarter to quarter because the January quarter.
Alexander Henderson: Typically.
Alexander Henderson: Locked down quarter for most service providers.
Alexander Henderson: In terms of <unk>.
Alexander Henderson: <unk> pointed out that there was a shift to <unk>.
Alexander Henderson: Transceivers, which they will install but not line system, so I'm assuming that the line systems.
Unknown Attendee: ....
Unknown Attendee: Transcribed by https://otter.ai, ship. Unknown Attendee, Under the ship, Let me give you a little context here, Alex. You have to think about that services business. Really, it's two businesses. One is maintenance, and one is installation.
Alexander Henderson: Installation is going to increase meaningfully quarter to quarter.
Alexander Henderson: And therefore youre looking at 200.
Alexander Henderson: $10 million to $220 million.
Alexander Henderson: Of service, which would imply that the.
James E. Moylan: Those are the two things that we deal with. We have some other consulting-type practices and advanced-type services, but those two make up the bulk of it. The maintenance expense is going to grow essentially as our product sales grow because almost everybody takes maintenance with our products. So that's one piece.
Alexander Henderson: Two.
Alexander Henderson: The product sales are down.
Alexander Henderson: 25% to 35% something in that range.
Alexander Henderson: And how does that play out over the course of the year.
As.
The installation continues to be.
Alexander Henderson: Churning through what's been shipped as opposed to.
Alexander Henderson: New shipments and then does it fall off at some point after.
Alexander Henderson: Under shipment period.
James E. Moylan: On the implementation side, it's not one-size-fits-all. For most of the larger carriers in the U.S., we don't do a ton of installation. Now, we have started to, as they are trying to work through their inventory levels. But in the past, we didn't do a lot of installation for them. In places like Asia, South America, sometimes in Europe, we do a lot of installation.
Alexander Henderson: So we get out into the fourth quarter and into the first half of 'twenty five.
Alexander Henderson: Service start to roll off can you.
Speaker Change: Give us some guidance on that.
Speaker Change: Let me give you a little context here, Alex you have to think about that services business really its two businesses. One is maintenance and one is installation those are the two things that we've done when we have some other consulting type practices and advanced type services, but those two make up the bulk of it the maintenance expense is going to.
Speaker Change: Essentially as our product.
Speaker Change: Sales growth because almost everybody takes maintenance with our products. So that's one piece on the implementation side, it's not one size fits all for most.
Of the larger carriers in the U S. We don't do a ton of installations now we've started to as they are trying to work through their inventory levels, but in the past we didn't do a lot of installation for them.
Unknown Attendee: So our services mix is going to be, I think, more related to where our sales are. And I'd say this, that we love expanding our implementation business, and we'd love to continue to help our big customers here in the U.S., and that's what we're trying to do. Scott?
Speaker Change: In places like.
Speaker Change: Asia South America, sometimes in Europe, we do a lot of installation. So our services mix is going to be I think more related to where our sales are and I would say this that we love expanding our.
Speaker Change: Implementation business and we'd love to continue to help our big customers here in the U S and that's what we're trying to do Scott yes.
Scott Alexander McFeely: Yeah, that's the dominant dynamic, Jim. You're right. I think there's some nuances in there. You know, the installation services pieces of it; it varies by geography, and it varies by portfolio. So historically, we haven't done a lot of installation services on our running and switching portfolio, for example, as those solution sets get more sophisticated as our customers are and will continue to look to us to do more installations. You know, geographically mixed, in some parts of the world, we do those installation services ourselves, in some parts of the world, the customers do them themselves, in some parts, they turn to third-party partners to do them, and there's a, you know, it varies quite a bit on the mix of where that revenue is coming from, and that's going to change over time.
Scott Alexander McFeely: That's the dominant dynamic Jim Youre right I think there are some nuances in there.
Scott Alexander McFeely: The installation services pieces of it.
Scott Alexander McFeely: It varies by geography, and it varies by portfolio. So historically, we haven't done a lot of installation services on our routing and switching portfolio for example, as those.
Scott Alexander McFeely: Solutions sets get more sophisticated as our customers are and will continue to look to us to do more installation.
Scott Alexander McFeely: Mixed geography geographically in some parts of the world, We do those installation services ourselves in some parts of the world the customers doing yourselves in some parts. They turned to third party partners to do it and there is.
Scott Alexander McFeely: It varies quite a bit on the mix of where that revenue is coming from and thats going to change over time. In addition to that it's not a major piece of it but our services team is also busy trying to expand their service offers to our customers and we hope to grow over time, we think our service business is going to continue to grow at or above the growth rate for the company.
Scott Alexander McFeely: In addition to that, it's not a major piece of it, but our services team is also busy, you know, trying to expand their service offerings to our customers, which we hope to grow over time. We think our service business is going to continue to grow at or above the growth rate for the company. Attendee, we Unknown Attendee, You know, it's always very risky to try to give individual slices of what we expect of our business.
Scott Alexander McFeely: Just to be clear, though.
Scott Alexander McFeely: Seasonal swing between the January and the April quarter normally services are lower.
Scott Alexander McFeely: In the first quarter because of the lockdown.
Scott Alexander McFeely: Are we expecting it to be up sequentially to 12 to 15, something like that in which case the majority of the quarter to quarter decline is in the product side.
Scott Alexander McFeely: It's always very risky to try to give individual slices of what we expect of our business I would think this because of the dynamics that we talked about because we will show growth in Q2 in our overall business. It is likely that services will grow as well so I don't have enough.
James E. Moylan: I would think that because of the dynamics that we talked about, because we will show growth in Q2 in our overall business, it is likely that services will grow as well. So I don't have a number for you, but I think it'll probably grow just like the product, and the revenue will grow in Q2. David, your line might be muted.
Scott Alexander McFeely: For you, but I think it will probably grow just like the product.
Scott Alexander McFeely: Revenue will grow in Q2.
Speaker Change: Okay. Thanks.
Speaker Change: Thanks Ross.
David Vogt: The next question comes from David vote with UBS. Please go ahead.
David Vogt: Hi, David.
David Vogt: David Your line.
David M. Rothenstein: Sorry. Sorry, guys. I was on mute.
David Vogt: Sorry, sorry, guys I was on mute thanks again for all the color.
David M. Rothenstein: Thanks again for all the color. Maybe just digging back into backlog and orders, maybe, Jim, can you help us understand where backlog exited the quarter? I think last quarter you mentioned it was roughly around $2.6 billion. And so what we're trying to figure out is what the orders look like going forward and how to kind of triangulate the growth rate in 25 in terms of an order trajectory, and I have a follow-up question. Backlog; we ended the backlog in Q1 at $2.2 billion.
David Vogt: Maybe just digging back into backlog and orders maybe Jim can you help us understand where backlog exited the quarter I think last quarter. You had mentioned it was roughly around $2 6 billion and so what we're trying to figure out is what the <unk>.
David Vogt: Orders look like going forward and how to kind of triangulate the growth rate in 'twenty five in terms of an order trajectory.
Speaker Change: And I have a follow up.
Our backlog we ended backlog at Q1 at $2 $2 billion. So.
James E. Moylan: So you can sort of calculate what our orders were in Q1. We said last quarter, that we expect our backlog, generally speaking, to come down, for the full year because we are approaching historical levels of lead times and customer ordering behaviors are probably going to track those in the past, which means that our ending year backlog is going to approach a level like the levels we had prior to all the craziness of the past three years, which traditionally has been about 35 to 40 percent of the coming year's revenue, and that consists of, you know, A billion dollars or so of services and about a billion dollars of products and software. That's what it's been historically. Great.
James E. Moylan: You can sort of calculate what our orders were in Q1.
James E. Moylan: We said last quarter.
James E. Moylan: That.
James E. Moylan: We expect our backlog generally speaking to come down.
James E. Moylan: For the full year, because we are approaching historical levels of lead times and customer ordering behaviors are probably going to attract those in the past, which means that our ending year backlog is going to approach a level.
James E. Moylan: The levels, we had prior to all the craziness of the past three years, which traditionally has been about 35% to 40% of the coming years revenue and that consists of.
James E. Moylan: $1 billion or so of services and about $1 billion of products and so on.
James E. Moylan: That's where that's what it's been historically.
James E. Moylan: Great.
James E. Moylan: What makes up the $2 two great until maybe if I just extrapolate that comment in 'twenty four into 25, maybe I'm doing the math wrong here, but it would imply that your order growth rate in 25, we'd have to be up somewhere like 35% to 40% relative to 24 are we doing the math right and if that's the case what does that imply for SP orders coming back next.
David M. Rothenstein: And so maybe if I just extrapolate that comment. In 24 to 25, maybe I'm doing the math wrong here, but it would imply that your order growth rate in 25 would have to be up somewhere like 35 to 40 percent relative to 24. Are we doing the math right?
David M. Rothenstein: And if that's the case, you know, what does that imply for SP orders coming back next year? I know you didn't give a full year guide yet, it's early, but just trying to kind of triangulate on how we get to those, you know, that six to eight percent multi-year target that you just provided. Thanks.
James E. Moylan: Year I know you didn't give full year guide yet it's early but just trying to kind of triangulate on how we get to those that 6% to 8% multiyear target that you just provided.
Ruben Roy: Rather than give you a number for our growth rate and orders next year, what I would say is this: a healthy business, which we've had for a long, long time prior to the supply chain disruption and COVID and all that sort of stuff. We typically ran orders in a given year at some fraction above our revenue, whether it was 5%, whether it was 10%, some number like that. So we're not at those levels right now, which means that we do have to have some catch up as we move through the next couple of quarters and possibly some catch up next year. But that's what we expect our order volumes to be, you know, 1.05 to 1.1 times our revenue for a year, for example, and it varies by quarter.
James E. Moylan: Yes.
Speaker Change: Rather than give you a number for our growth rate in orders next year, what I would say is this.
Speaker Change: A healthy business, which we've had for a long long time prior to the supply chain disruption and Covid and all that sort of stuff. We typically ran orders in a given year at.
Speaker Change: Some fraction above our revenue whether it was 5% whether it was 10% some number like that so we're not at those levels right now, which means that we do have to have some catch up as we move through the next couple of quarters and possibly some catch up next year, but that's what we expect our order.
Speaker Change: Volumes to be one point to one one times our revenue for a.
Speaker Change: A year for example, and it varies by quarter.
Ruben Roy: And that's obviously a function of the lead time piece as well. So typically, if the world ever gets normalized, it would be slightly ahead of revenues for the year. Now there may be some bumpiness as we get into that. I mean, for example, in 22, I think our orders were close to $6 billion, just to give you an order of magnitude around the challenges that we're having from a backlog point of view. Got it. Very helpful, Gary. Thanks, Jim. I appreciate it.
Speaker Change: That's obviously a function of the lead time piece as well so typically are.
Speaker Change: If the world ever gets normalized it would be slightly ahead of the revenues for the year and now there may be some lumpiness as we get into that I mean for example in 'twenty. Two I think our orders were close to $6 billion just to give you an order of magnitude around the challenges that we're having from a backlog point of view.
Speaker Change: Got it that's helpful. Gary Thanks, Jim I appreciate it.
Speaker Change: Thanks, David.
Speaker Change: The next question comes from Ruben Roy with Stifel. Please go ahead.
Gary B. Smith: Yes, thank you for taking my question. Gary, I had a follow up on some of the commentary around AI and then. I'm just trying to work through, you know, not seeing yet, you know, sort of the impacts of traffic growth outside of the data. Unknown Attendee, Unknown Attendee, Alexander Henderson, Ruben Roy, Samik Chatterjee, David Vogt, Karan Juvekar, Gregory Mesniaeff, Ciena Corp. Yeah, I think it's more of a mix than you think around Long Haul and Metro amongst these. When we talk about them, and we all tend to think of these hyperscalers as sort of, you So, therefore, their networks are actually very different as well, including all of the submarine cables and the Metro piece and the rest of it. So these are now...
Ruben Roy: Yes. Thank you for taking my question, Gary I had a follow up on this.
Ruben Roy: Some of the commentary around AI and then.
The increase in water rates with cloud and just trying to work through.
Ruben Roy: Not seeing yet sort of.
Ruben Roy: Impacts of traffic growth outside of the data center.
Gary B. Smith: Then you mentioned being created by the Gpus et cetera, and yet the order rates are up so am I right in assuming that the cloud Dci business is mostly for long haul and if that's the case can you talk to sort of how youre thinking about the sustainability of those orders around that specific business cloud Dci.
Gary B. Smith: Yes, I think it is it's more of a mix than you think around long haul and metro amongst these when we talk about them. When we all tend to these hyperscale is sort of sort of generic grouping you think about that business models. They are all very different.
Gary B. Smith: Be it search be cloud et cetera.
Gary B. Smith: Type services. So therefore, then networks are actually very different as well in.
Gary B. Smith: And including all of the submarine cables in the Metro pace in the rest of it. So these are now very large very complicated global networks that is not just simple datacenter connectivity point to point.
Gary B. Smith: Very large, very complicated global networks that are not just simple, you know, data center connectivity, you know, point to point. They are, you know, they use 6500 in full configuration with, you know, resilience, etc., across them. So they are, you know, fully blown intelligent networks. So to your point, Ruben, around that, and then the traffic that they're obviously flowing right now is data center to data center. The opportunity is when you get the AI applications coming out of the data center to monetize, they have to go to the WAN. They have to go to consumers in their various forms, be them enterprise or general consumers, and it has to pass across that network. And also, from a model point of view, it needs to talk to the instantiation locally, be it Edge Compute or whatever the devices are.
Gary B. Smith: They are they use 6500 and full configuration with resilience et cetera across there. So they are fully blown intelligent.
Gary B. Smith: Networks.
Speaker Change: So to your point Ruben Randy on the traffic.
Speaker Change: Obviously flowing right now as data center to data center.
Speaker Change: The opportunity is.
Speaker Change: When you get the AI applications coming out of the data center to monetize they have to go to the when they have to go to consumers in their various forms be them enterprise or.
Speaker Change: General consumers and it has to pass across that network and also from a model point of view it needs to talk to the instantiation locally edge compute or whatever the devices or it needs to maintain connectivity to it. It's not just you don't model down there at the edge of the network and you're good to go for a month.
Gary B. Smith: It needs to maintain connectivity to it. It's not just that you dump the model down there at the edge of the network, and you're good to go for a month. This stuff has to maintain connectivity, so we're all sort of very excited about the opportunity, but that hasn't yet come out of the data center. But they're obviously investing massive amounts of... Investment in compute and in the application and monetization of that. That has not yet flowed to the network yet. The other dynamic in the AI piece, you know, having impact on WAN traffic is because of the massive amounts of compute and the power required to do that. Every one of the cloud providers is talking about the need to further distribute their compute platforms. And that's going to mean more data centers and more geographical distribution. And guess what?
Speaker Change: This stuff has to maintain connectivity so.
Speaker Change: <unk> sort of.
Speaker Change: Very excited about the opportunity but.
Speaker Change: That hasnt, yet come out of the data center, but they're obviously invest in massive amounts of.
Speaker Change: Investment in the compute and the application of monetization of that that is not that investment has not flowed to the network yet.
Speaker Change: The other dynamic on the Aip's, having impact on the land traffic is because of the massive amounts of compute and the power required to do that every one of the cloud providers is talking about the need to further distribute their compute platforms and thats going to mean.
Speaker Change: More data centers more geographical distribution and guess what when you do that you've got a network them together, so thats going to be more transport more networking gear, that's going to be another dynamic is AI starts to have an influence on I'll just say the classic transport.
Gary B. Smith: When you do that, you've got to network them together. So that's going to be more transport, and more networking gear. That's going to be another dynamic as AI starts to have an influence on, I'll just say, the classic transport part of the network. And I think I'd add, Gary, in terms of where we are today with these folks. It's yes, it's their campus slash metro DCI, it's their terrestrial core networks, it's their submarine networks, but it's also across our transport portfolio. It's line systems, it's coherent modems, and however they want to substantiate it.
Speaker Change: Part of the network I think I would add Gary in terms of where are we today with these folks.
Yes, it's their campus slash Metro Dci, it's their terrestrial core networks, it's their submarine networks, but it's also across our our transport portfolio. Its mine systems, it's coherent motives and however, they want us to substantiate it and to some people surprises, it's our software portfolio and it's our services portfolio as well.
Speaker Change: So it's quite a broad set of.
Gary B. Smith: And to some people's surprise, it's our software portfolio and it's our services portfolio as well. So it's quite a broad set of solutions that we're in that segment with. I really appreciate it. If I could sneak in a quick one for Jim on Gross-Martin's,
Speaker Change: Solutions that were in those in that segment with.
Speaker Change: I really appreciate the detail guys. That's really helpful for me.
Speaker Change: Sneak in a quick one for Jim on gross margins Jim.
James E. Moylan: So we are maintaining the mid <unk> for the full year.
Ruben Roy: Jim, just sort of maintaining, Unknown Attendee, I might have missed this, but did you talk through mix or linearity of, you know, how you think gross margins will play out? I think they're going to be a bit lower in Q2, and that's mix and volume because, as we said, we won't have the volume that we expected in Q2. But I think we'll average in the mid-40s for the full year. We started the year at 45.7.
James E. Moylan: Lower volumes and lower revenue can you just.
James E. Moylan: I might have missed this but did you talk to your mix or linearity and how you think gross margins play out over the next several quarters.
James E. Moylan: Yes, I think theyre going to be a bit lower in Q2 and Thats a.
James E. Moylan: Mix and volume because as we said, we're not going to have the volume that we expected in Q2, but I think we will average in the mid <unk> for the full year, we started the year at $45 seven it was a good strong start.
James E. Moylan: It was a good, strong start, and we'll get back to something like that. Thanks so much. All right, thank you, Ruben. Thank you, everybody, for joining us today. We appreciate your attention, and we look forward to seeing everyone at OFC. Thank you, and have a good day.
James E. Moylan: We'll get back to something like that.
Speaker Change: Understood. Thank you.
Speaker Change: Alright, Thank you Rob and thank you everybody for joining us today, we appreciate you.
Speaker Change: Your attention and we look forward to seeing everyone at OFC. Thank you and have a good day.
The conference has now concluded thank you for attending today's presentation.
Speaker Change: May now disconnect.